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A Sustainable Century?

University Press Scholarship Online

Oxford Scholarship Online

National Wealth: What is Missing, Why it Matters

Kirk Hamilton and Cameron Hepburn

Print publication date: 2017

Print ISBN-13: 9780198803720
Published to Oxford Scholarship Online: October 2017
DOI: 10.1093/oso/9780198803720.001.0001

A Sustainable Century?
Genuine Savings in Developing and Developed Countries,
1900–2000

Matthias Blum
Cristián Ducoing
Eoin McLaughlin

DOI:10.1093/oso/9780198803720.003.0005

Abstract and Keywords

Page 1 of 42

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2019. All
Rights Reserved. Under the terms of the licence agreement, an individual user may print out a PDF of a single chapter of a
monograph in OSO for personal use (for details see www.oxfordscholarship.com/page/privacy-policy). Subscriber: Ecole
Normale Superieure; date: 12 February 2019
A Sustainable Century?

This chapter traces the long-run development of genuine

savings (GS) during the twentieth century using a panel of
developed countries (Great Britain, Germany, Switzerland,
France, the US, and Australia) and resource-abundant
countries in Latin America (Argentina, Brazil, Chile, Colombia,
and Mexico) representing approximately 50% of the world’s
output in terms of GDP by 1950. It includes large economies
and small open economies, and resource-rich and resource-
scarce countries, allowing comparison of their historical
experiences. Components of GS considered include physical
and human capital as well as resource extraction and pollution
damages. Generally, there is evidence of positive GS over the
course of the twentieth century, although the two world wars
and the Great Depression left considerable marks, but also
striking differences between Latin American and developed
countries when total factor productivity is included; this could
be a signal of natural resource curse or technological gaps
unnoticed in previous works.

Keywords: Genuine Savings, Developed countries, Latin America, Natural

capital, Sustainability

5.1 Introduction

Page 2 of 42

Over the past quarter-century, genuine savings (GS), or

adjusted net savings (ANS), has emerged as an important
indicator of sustainable development. It is based on the
concept of wealth accounting, and it is argued that it
addresses shortcomings in conventional metrics of economic
development by incorporating broader measures of saving and
investment (Hamilton and Hepburn, 2014; Stiglitz, Sen, and
Fitoussi, 2010).1 GS measures year-on-year changes in total
capital stocks (physical, natural, social, institutional, and
human). Following the pioneering studies of Pearce and
Atkinson (1993) and Hamilton (1994), the World Bank has
published estimates of GS from the mid-1990s to the present
(World Bank, 1997, 2011, 2015). Hamilton and Clemens (1999)
and World Bank (2006, 2011) illustrate the nature of these
estimates for almost all countries in the world and show how a
negative GS indicator can be interpreted as a signal of
unsustainable development. Current World Bank GS data at
the country level stretches back to the 1970s, and provides
empirical evidence of the levels of sustainable and
unsustainable economic development throughout the world.2
The recent 2013 global average GS rate was 8.35 per cent of
Gross (p.90) National Income; however, there was
considerable variation in the data, with values ranging from
−49.89 to 36.41 per cent of Gross National Income.

Page 3 of 42

The question of sustainability is inherently about scale. Should

our focus be on the global, national, or local? The most
common unit of analyses in macroeconomic studies is nation
states as these polities regularly publish data pertaining to
their political borders. Thus, the World Bank collates and
publishes national indicators of sustainability, but arguably it
is global sustainability that is a more pressing concern given
that resource production and consumption, pollution, and
technology spillovers are subject to global externalities. The
issue of scale is at the centre of Pezzey and Burke (2014), who
seek to understand why national GS indicators (generally
positive) give conflicting signals compared with alternative
ecological-based indicators of sustainability (overwhelmingly
negative). Their answer lies in how the accounting of pollution
damages (primarily carbon) is undertaken in practice. Rather
than using literature-derived prices, they instead re-estimate
the underlying DICE (Dynamic Integrated Climate Economy)
models and derive new estimates of the social costs of carbon
prices. They find that models assuming that future carbon
dioxide (CO2) emissions are controlled lead to indicators of
sustainability not too dissimilar to the World Bank’s, while the
business-as-usual assumption leads to an indicator of
unsustainability. While global estimates may be the ideal for
gauging sustainability paths, economic and environmental
policy are designed and implemented at the national level.
Therefore, we follow the Pezzey and Burke (2014) paradigm
and aggregate national measures of GS to construct aggregate
‘global’ indicators of sustainability, and incorporate global
externalities (mainly CO2 emissions) in this calculation.
However, we also present national indicators, excluding the
global pollutants, so that comparison can be made both
between countries and with components of the global
estimate.

Page 4 of 42

This chapter follows the framework of Hamilton and Clemens

(1999) and World Bank (2006, 2011) to extend estimates of GS
back to the start of the twentieth century. We track the
evolution of fixed capital formation, natural resource use, and
educational expenditure across a number of countries in
Western Europe, the Americas, and the Antipodes. In addition,
we have included a value of technological progress, or what
Pezzey (2004) refers to as the ‘value of time passing’, which
increases the future consumption possibilities of a country. We
do this by incorporating country-specific estimates of the
contribution of total factor productivity (TFP) to sustainable
development, because, as Weitzman (1997, 1999) illustrates,
incorporating TFP can make ‘a sizeable adjustment’ to the
sustainability indicator proposed. Effectively, what TFP growth
implies is that even if capital stocks remain constant over
time, output can increase due to efficiency gains.

The literature on GS relates to two major themes in the

economic history literature, namely capital formation and
growth accounting. The focus on (p.91) capital as a basis for
sustainability harks back to an old literature (e.g. Rostow,
1960) on the importance of capital in the Industrial
Revolution.3 Statements about the centrality of capital led to a
research agenda involving the construction of historical
capital stock estimates for developed countries (e.g. Feinstein
and Pollard, 1988), and these pioneering studies form the
basis of this undertaking. Also relevant to this project is the
work of Angus Maddison (2001) who constructed historical
GDP estimates from the 1800s for many countries (again
building on the national account estimates by Feinstein (1972)
and others). Maddison’s main objective was to construct
comparable historical GDP estimates to chart the path of
economic growth and development over time (Bolt and van
Zanden, 2014). Although the GS approach outlined in this
chapter shares similar roots with this growth literature, the
emphasis is on welfare rather than outright growth, and the
emphasis on broader measures of saving is what distinguishes
GS from the wider growth literature (Ferreira, Hamilton and
Vincent, 2008); this is where our historical contribution lies.

Page 5 of 42

Following the trajectory of GS over the twentieth century

allows us to re-investigate the eventful economic history of the
century from the vantage of sustainability. The panel of
countries we use to study this period in history includes
leading Western economies such as the US, Germany, Great
Britain, Australia, and France, and a set of Latin American
resource-dependent economies such as Brazil, Chile,
Colombia, and Mexico. Argentina serves as the counterpart of
these resource-extracting countries, whereas Switzerland
allows us to assess the experience of a small open economy in
the midst of European turmoil. The initial period of our study
is the heyday of the first era of globalization, with free capital
and labour movements and a drive towards freer trade. The
First World War was a major dislocation to the international
economy and this is a period in which many of our countries
experience negative GS. The interwar period witnessed the
Great Depression and the reintroduction of trade barriers. The
Second World War was another shock to the international
economy. In the post-Second World War period we see a
gradual return to freer trade and integration in commodity
markets. The period 1970–2000 is also the backdrop of the
‘curse of natural resources’, whereby Sachs and Warner (2001,
1999) found a negative correlation between the share of
primary exports in GDP and future GDP growth; countries in
Latin America were seen as the prime exemplars of this
(Sachs, 1999).

Page 6 of 42

(p.92) The economic development of Latin America has been

a recurrent topic in twentieth-century economic history,
especially in the debate about divergence and convergence
(Bértola and Ocampo, 2012). At the outset of the twentieth
century Argentina and Chile had levels of GDP per capita
comparable to some European states such as France or
Germany, yet by the end of the millennium there was
significant divergence (Bolt and van Zanden, 2014). There are
several reasons behind the divergence during the interwar
period (1918–38); however, recent studies point to the
extenuation of an economic model based on natural resources
exports and a lack of productive diversification (Tafunell and
Ducoing, 2016). There is still debate surrounding the effects of
import substitution industrialization (ISI) in the post-Second
World War period. The strong growth performance of larger
countries, such as Mexico or Brazil, which stood in contrast to
the poorer growth rates exhibited by the Southern Cone
region (Argentina, Chile, and Uruguay), opened a discussion
about the gains and losses of this economic policy (Gómez-
Galvarriato and Williamson, 2009), and the timing of the
divergence between Latin America and the developed world
(Prados de la Escosura, 2009). In direct relation to this debate
and the aim of this chapter, natural resource prices have
played a key role in Latin American development. Latin
American economic thought after the Second World War was
strongly influenced by the Prebisch–Singer hypothesis (secular
deterioration in primary commodity prices relative to
manufactured goods). The current extenuation of the so-called
‘super cycle’ has increased worries about the region’s
economic future.

Page 7 of 42

Our headline results (Table 5.1 and Figure 5.1) show that, in
general, the aggregate global GS measure was positive. We
find that all countries were on a positive development path in
terms of physical capital accumulation. When more
comprehensive savings indicators are used, we find that
natural resource depletion lowers saving rates considerably in
resource-abundant economies, (p.93) and results in negative
saving rates in some Latin American countries. We find that
the accumulation of intangible assets plays an increasingly
important role, especially for leading Western economies
during the second half of the twentieth century. The share of
intangible assets has constantly increased ever since,
constituting the most important single contributing factor to
wealth (p.94) accumulation in the majority of countries in
our panel by the end of the twentieth century.

Page 8 of 42

Table 5.1 Global Net Investment, Green, Genuine Savings, GSTFP, and GreenTFP as share of GDP

CO2 prices under optimal control $131 (2005) CO2 prices under no control $1,455 (2005)

Net Green GreenCO2 GS GSTFP GreenTFP GreenCO2 GS GSTFP GreenTFP

investment

% % % % % % % % % %

1900–2000

7.39 4.97 3.74 6.88 33.01 30.08 −8.61 −5.47 20.80 17.86

1900–46

7.47 4.97 3.94 5.69 32.93 31.19 −6.50 −4.75 20.50 20.75

1946–2000

7.33 4.96 3.58 7.88 33.09 28.94 −10.38 −6.08 19.05 14.91
Sources: GDP: Bolt and van Zanden (2014). GS estimations: http://www.st-andrews.ac.uk/gsd/research/envecon/
eediscus

Page 9 of 42

PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2019. All Rights Reserved. Under the terms of the licence agreement, an
individual user may print out a PDF of a single chapter of a monograph in OSO for personal use (for details see www.oxfordscholarship.com/page/privacy-policy). Subscriber: Ecole Normale
Superieure; date: 12 February 2019
A Sustainable Century?

5.2 Genuine
Savings as
an Indicator
of

Figure 5.1 Global estimations of Net

Investment, Green Investment, GS, and
GSTFP per capita. GK$ 1990. CO2
estimations with prices under control
($131 in 2005) and no control ($1 455 in
2005)
Sources: Data appendix, http://www.st-
andrews.ac.uk/media/dept-of-geography-
and-sustainable-development/pdf-s/
DP%202016-15%20Blum%20et%20al.pdf

Sustainability

Page 10 of 42

The economics of sustainable development is traditionally

based on capabilities- or outcome-based definitions of what
constitutes sustainable development. The capabilities-based
approach views a sustainable development path of an economy
as one where the (per capita) real values of changes in capital
stocks are non-negative (i.e. constant or increasing), whereas
the means-based approach views a sustainable development
path as one where utility or consumption per capita is non-
declining (Hanley, Dupuy, and McLaughlin, 2015).
Furthermore, what constitutes sustainable development also
depends on how one perceives total capital, one version being
that sustainable development requires non-declining total
wealth (weak sustainability), and another that it requires non-
declining natural capital (strong sustainability). The first
approach assumes perfect substitutability between different
types of capital and that natural capital can be valued in
monetary terms.4 The latter approach sees natural capital as
having critical thresholds and that a decrease in a physical
unit of natural capital cannot be replaced by an increase in the
quantity of other forms of capital. As the degree of
substitutability is difficult to establish empirically (e.g.
Markandya and Pedroso-Galinato, 2007), how one chooses to
approach sustainable development, from a weak or strong
perspective, is a matter of preference based on values.
Moreover, this dichotomy is in some respects spurious because
if a country fails a weak sustainability test it will in all
likelihood also fail a strong test as well.

Page 11 of 42

Using the definition of sustainable development from the

Brundtland Report,5 the weak approach to sustainability links
future well-being with changes in wealth (or capital stocks)
(Pearce, 2002). The theoretical underpinnings of the
neoclassical approach to weak sustainability are now well
established (see Hanley, Dupuy, and McLaughlin, 2015, for a
comprehensive review). The underlying logic is that future
consumption can be seen as a form of interest on past wealth
accumulation, since the productive basis (labour, physical and
intangible capital) are the forces used to generate income. (p.
95) The GS approach to sustainability rests firmly on the so-
called Hartwick Rule (Hartwick, 1977), as this shows how
consumption can be constant over time by reinvesting rents
from natural resource extraction into other forms of capital
(manmade or human). One of the attractions of GS is that,
under certain assumptions, it can be used to assess both the
capabilities-based and the outcome-based approaches to
sustainable development (Hanley, Dupuy, and McLaughlin,
2015). Another attraction is that it is firmly grounded in the
System of National Accounts (SNA) framework and can be
used to measure and compare countries in a consistent
manner.

Over the past twenty-five years there have been a series of GS

estimates for a host of countries. The time period covered by
most estimates range from the 1970s to the present (Hamilton
and Clemens, 1999; World Bank, 2011), although a number of
studies have calculated GS for shorter (Pezzey et al., 2006;
Mota and Domingos, 2013; Ferreira and Vincent, 2005; Pezzey
and Burke, 2014; Ferreira and Moro, 2011) and longer
(Greasley et al., 2016; Lindmark and Acar, 2013; Greasley et
al., 2014; Hanley et al., 2016; Rubio, 2004) horizons. Studies
have tended to trade off scale and scope, with some focusing
on individual countries being richer in data quality but not
directly comparable with other country-specific studies.
Definitions of metrics have also varied with ‘green’ and
‘genuine’ savings measures commonly constructed and used
interchangeably (see Hanley et al., 2015, for a review of the
empirical literature).

Page 12 of 42

Technological change has been an important concept in the

theoretical literature (e.g. (Weitzman, 1997; Weitzman, 1999;
Pemberton and Ulph, 2001), but there are a number of
challenges in incorporating a measure of technological change
into empirical studies.6 Some studies have attempted to
address this and have used TFP growth as an indicator of
technological progress and incorporated this into the GS
framework through the net present value of TFP’s contribution
to future GDP growth (Pezzey et al., 2006; Mota and
Domingos, 2013; Greasley et al., 2014).

There have been a number of empirical tests of the theoretical

properties of GS and its link with future consumption and, in
general, the evidence tends to be supportive of the predictive
power of GS. For example, Ferreira and Vincent (2005),
Ferreira et al. (2008), and World Bank (2006) find a positive
correlation between GS and the present value of future
changes in consumption.7 Similarly, using the same testing
structure, there is evidence of a longer-run relationship
between GS and future changes in well-being (real wages and
consumption per capita), although here the results suggest
that the choice of time horizon (p.96) and discount rate has
the greatest effect on the estimated parameters (Greasley et
al., 2014; Hanley et al., 2016).

Page 13 of 42

Another issue with current empirical indicators is the

treatment of international trade flows. For example, countries
heavily reliant on the export of natural resources can be
deemed to have negative GS, while countries importing
natural resources will have positive GS as they are not
consuming their ‘national’ natural capital. Atkinson, Agarwala,
and Muñoz (2012) explore this importing and exporting of
sustainability using input–output models to assess the trade
flows of countries, and they find a clear trend of countries’
production of natural resources (i.e. extraction) being much
less than their consumption. Moreover, changing trade
patterns in recent years have seen a shift in manufacturing
from developed to developing countries, and this is reflected
in a shift in emissions—for example, European CO2 emission
reductions were as much a result of structural changes as they
were due to environmental policy such as the EU Emissions
Trading System (Koch et al., 2014). In a sense, this links back
to the literature on the ‘pollution haven hypothesis’—i.e.
tightening environmental regulation or changes in preferences
for environmental goods can lead to an outsourcing of
pollution to other areas with lower environmental regulatory
standards or preferences. While we do not have the data to
observe trade patterns over time or CO2 flows, by scaling up to
a ‘global’ level we can attempt to reduce some of the
limitations that these trade flows may induce in our estimates.

5.3 Data and Methodology

We have largely followed the World Bank (2011, 2006)
methodology, as outlined by Bolt, Matete, and Clemens (2002),
to calculate a range of increasingly comprehensive measures
of year-on-year changes in total capital over time. We
construct the following indicators to display and distinguish
several degrees of sustainability:

• Net Investment = net fixed produced capital

formation and overseas investment
• Green Investment = Net + Δ natural capital
• Genuine Savings (GS) = Green Investment +
education expenditure
• GSTFP = GS + Net Present Value of TFP
• GScarbon = GS − carbon emissions
• GSTFPcarbon = GSTFP − carbon emissions

Page 14 of 42

To allow comparability across space and time, all units have

been deflated using national GDP deflators and have been
converted into purchasing-power-adjusted (p.97)
international dollars following Maddison (2001), expressed as
Geary–Khamis dollars ($) in the figures below.8

An important component of GS is Net Investment, including

overseas investment, which reflects changes in a country’s
physical assets.9 Vincent (2001), a study of Latin American
‘Green’ investment over the period 1973–86, lamented the
quality of conventional measures of reproducible capital in
Latin American countries. In order to overcome this concern,
we make use of new capital stock estimates for these countries
(Tafunell and Ducoing, 2016).

To account for the depletion of natural (renewable and non-

renewable) resources, we subtracted the rent from the
depletion of natural resources, using gross revenues minus
average costs of depletion, from Net Investment.10 For
European countries, the bulk of gross revenues from resource
extraction originate from the extraction of coal and, for more
recent times, from oil and natural gas (Great Britain). We also
considered other resources, but by and large the quantities
are negligible compared with the accumulation of other assets.
For the US and Australia, two resource-abundant developed
nations, we included data on coal, oil and gas, metal and
mineral ores, and changes in forestry. For Latin American
countries, resources considered include metal and mineral
ores and fossil fuels. Important sources of natural capital
depletion are petroleum (Argentina, Colombia, Mexico), gold
(Brazil, Colombia), silver (Colombia), coal (Brazil), and copper
(Chile).

Page 15 of 42

Education expenditure is used to proxy the accumulation of

human capital to obtain a more inclusive measure of a
country’s assets. Admittedly there are limitations to this
approach as it is known that education does not perfectly
equate with human capital; however, alternative
measurements of human capital stocks, such as discounted
lifetime earnings, are not available for all countries over the
whole of our sample. Furthermore, an additional limitation (p.
98) of this approach is that education expenditure as a proxy
for human capital accumulation makes no allowances for
appreciation (e.g. on-the-job training and experience) and
depreciation (ageing and mortality) of human capital.
Moreover, this approach does not account for international
migration whereby migrant recipients benefit from the human
capital embodied in immigrants, and developing countries may
experience losses in human capital through emigration.

We added a proxy for the accumulation of technology to take

into account intangible assets as outlined by Weitzman (1997).
Weitzman suggests that this adjustment may be in the region
of 40 per cent of Net National Product. Thus, omitting a
technological progress measure would mis-state the degree of
sustainability of an economy. In relation to technological
progress, although many of the general-purpose technologies
were invented in the late nineteenth century (telephone,
electricity, combustion engine), it was not until the twentieth
century that they were adopted en masse and, in many cases,
this meant the use of new natural resources that had been
overlooked in the past (oil and natural gas, for example). This
in turn led to a more efficient use of resources such as
improvements in fuel efficiency (Gordon, 2016). Therefore, we
have incorporated the effects of exogenous technological
progress in our measure of GS by including the present value
of TFP growth over a twenty-year time horizon.

We calculate TFP assuming a standard Cobb-Douglas

production function with capital and labour measured in man-
hours:

Y=AL(α)K1−α

Page 16 of 42

Where Y equals income, L is labour (measured in man hours),

and K is the capital stock. A denotes TFP which is estimated as
a residual from this calculation. Trend TFP was used to
estimate the value of exogenous technological progress.11
Following Pezzey et al. (2006) and Greasley et al. (2014) we
calculate the present value of future changes in trend TFP
over a twenty-year time horizon. This captures the uncertainty
over the duration of the value of technological progress.12

TFP is a central piece of the puzzle to assess sustainable

development; this metric, however, is somewhat in conflict
with other components of GS. TFP is (p.99) related to
innovativeness, intangible assets, institutions, and social
capital, and as a consequence the incorporation of TFP brings
the risk of ‘double-counting’ the effects equally associated
with technology and human capital. Baier, Dwyer, and Tamura
(2006) find that incorporating a measure of human capital
reduces the size of the residual; Similarly, Manuelli and
Seshadri (2014) argue that better measurements of human
capital quantity and quality can further reduce TFP. There is
therefore reason to believe that the overlap between human
capital accumulation and the value of technology accumulation
leads to a slight overestimation of total capital formation. Data
limitations and availability prevent us from fully disentangling
human capital and technology. We therefore opt to incorporate
an unadjusted TFP series in our estimates; however, in the
results section we illustrate the effect of TFP appended to
Green Investment to avoid the possibility of double-counting
as education expenditure is included in GS.

Page 17 of 42

Finally, we incorporate in our global estimates a range of

prices related to damages from CO2 emissions. CO2 is a
greenhouse gas (GHG) with lifetime of up to 200 years in the
atmosphere, and accounts for 75 per cent of global warming
potential (Stern, 2007, Table 8.1). The crucial factor is that it
is a stock pollutant in that the annual emissions add to the
existing concentration in the atmosphere, and each unit of
emissions increases the marginal damage cost of the pollutant
in the future (Kunnas, et al., 2014). To account for CO2 in our
sustainability indicator we used the total amount of CO2
emitted and estimates of the social costs of carbon derived
from the wider literature. There are a range of price estimates
that we have incorporated, such as the constant $20/tonne
carbon (t/c) cost of the World Bank metric; $29 t/c from Tol
(2012); and $110 t/c from the Stern Review (Stern, 2007).
However, the results presented below purposely utilize the
more recent estimates of the social cost of carbon by Pezzey
and Burke (2014). The first price, $131 t/c, was estimated
using a DICE (Dynamic Integrated Climate Economy) model
recalibrated to assume that it is economically optimal to
control emissions such that warming may be limited to an
agreed target of 2°C; the significantly higher price of $1,455 t/
c assumes that no controls of CO2 emissions are implemented.
We chose to highlight these contrasting prices as our study
shares similarities with Pezzey and Burke (2014) in that we
also attempt to determine if the world is on a ‘global’
sustainability path. These prices are discounted over time, as
suggested by Tol (2012) and as illustrated by Kunnas et al.
(2014).13

Page 18 of 42

(p.100) A limitation of the construction of GS as outlined

above is that it covers only quantifiable indicators that can be
approximately expressed in monetary units. Thus GS overlooks
non-market environmental goods and services and, as a result,
the GS metric excludes developments in other pollutants such
as sulphur dioxide (SO2) and nitrogen oxide (NOx), as well as
developments in biodiversity and ecosystem services.
Historical estimates of SO2 and biodiversity are available but
these indicators are difficult to incorporate in an augmented
long-run GS metric until a compromise estimate of their
economic value over time is obtained. The absence of
monetary evaluations of these phenomena, however, cannot
hide the fact that economic growth seems to adversely affect
biodiversity and levels of pollution. The global output of SO2
increased throughout the twentieth century, with the major
share of SO2 being emitted in North America, followed by
Western Europe. Total global SO2 emissions rapidly rose after
the Second World War, and peaked around 1980. During the
late twentieth century, environmental regulation, combined
with fuel-saving technologies and a transition away from fuels
with a high-sulphur content, helped to lower global SO2 output
(Stern and Kaufmann, 1996; Smith et al., 2011). Losses in
biodiversity are largely the result of changes in land use—the
increasing demand for grazing and cropland has encouraged
deforestation which has had a dramatic detrimental impact on
biodiversity. Estimates of the development of biodiversity
suggest that Latin America and the US, along with the
majority of the world’s countries, experienced losses in
biodiversity, whereas some countries in Western Europe saw
stagnating or even increases in biodiversity.14 Any future
evaluation of the costs of biodiversity loss and SO2 emissions
will lower any sustainability indicator (for an overview see
Goldewijk, 2014).

5.4 Trends in Genuine Savings throughout the Twentieth

Century

Page 19 of 42

Trends in aggregate ‘global’ GS per capita are presented in

Figure 5.1, while Table 5.1 presents mean results as a share of
GDP. The debate on national versus global measures of
sustainability has been addressed by estimating a
comprehensive measure which incorporates all the countries
in this study (p.101) (Pezzey and Burke, 2014). In the ‘global
GS’ indicator we also take account of the CO2 prices outlined
by Pezzey and Burke (2014). These prices are markedly higher
than other estimates in the literature (e.g. Tol, 2012), and thus
add a significant negative premium on fossil-fuel-based
growth, especially the significantly higher ‘business-as-usual’
price. As a counterpoint to these results, a CO2 price of $20 t/c
or $29 t/c has a trivial impact on our metrics, effectively
rendering them no different to the ‘Green’ metric presented
below.

The full panel of countries accounts for approximately half of

the world’s GDP by 1950 (Maddison, 2001), and allows us a
glance at the degree of weak sustainability over the period of
observation. The global GS figure naturally reflects a mix of
country-specific experiences. For example, while some
belligerents experienced negative saving rates during the First
World War, other countries were largely unaffected. As a
result, global GS during the First World War does not suggest
a deterioration of global wealth accumulation. Conversely,
negative effects associated with the Great Depression and the
Second World War are clearly visible in the global GS figure;
these two periods were the only episodes in the twentieth
century when the world experienced substantial losses of
wealth. In the aftermath of the Second World War, global GS
recovered quickly, rising to unprecedented levels in the 1970s.
Starting with the economic depression in the 1980s, GS
decreased to somewhat lower levels, but remained
consistently high from a historical perspective. However,
results towards the end of our sample represent a declining
share of global GDP (40 per cent by 1990) and thus weaken
the global representativeness of our findings.

Page 20 of 42

In a counterfactual study of the extent to which countries

would be wealthier in terms of fixed capital if they followed
the Hartwick Rule and reinvested in fixed capital, Hamilton,
Ruta, and Tajibaeva (2006) illustrate the possibility of
unbounded and rising consumption if a GS rate of at least 5
per cent of GDP were maintained over time. The findings of
the study provide us with a yardstick with which to assess the
performance of our global metric from a sustainability
perspective in terms of its capacity for raising consumption
over future generations. For our ‘global’ indicator, Table 5.1
shows that Net Investment is overwhelmingly positive, which
indicates that rents were reinvested in the productive
capacities. However, in terms of Green Investment, this is
considerably lower and over the whole century is below the 5
per cent prescribed threshold outlined by Hamilton, Ruta, and
Tajibaeva (2006). When CO2 damages are accounted for, this
suggests a worse performance and although this metric is not
negative, CO2 damages are large and rising over the twentieth
century—and are likely to increase in the future. Our GS
indicator, which includes education expenditure, returns our
sustainability indicator towards a sustainability path, and
GSTFP even more so. The message appears to be clear:, the
twentieth century shows that, overall, the Hartwick (p.102)
Rule was followed, but worries about the legacy of CO2
emissions are evident. CO2 damages clearly indicate a path
towards lower ‘green savings’. Yet, taking a sanguine view, if
we continue to invest in human capital, and to adopt
technological solutions, we may continue on a sustainable
path.

Page 21 of 42

The data presented in Table 5.2 and Figures 5.2, 5.3, and 5.4
illustrate the patterns of our respective countries, although we
have opted to exclude CO2 from these metrics. Net Investment
in our panel of Western countries was generally positive,
ranging from approximately 5 per cent in Great Britain,
between 7 and 10 per cent in the US, Australia, France, and
Germany, to approximately 14 per cent in Switzerland.
Resource depletion played a modest role among these
countries, with Australia and the US depleting natural
resources in the amount of 3.4 and 2.7 per cent of GDP,
respectively. British and German depletion levels were
between 1 and 2 per cent of GDP, while French depletion
totals 0.6 per cent of GDP. Switzerland, a country almost
without any significant commercial natural resources,
accumulated natural capital due to the absence of depletion of
fossil fuels and minerals and afforestation. Our panel of
Western countries was relatively homogeneous in terms of
education expenditure; figures range from 2.2 to 3.7 per cent
of GDP.

Page 22 of 42

Table 5.2 Net Investment, Green, Genuine Savings, and GSTFP as share of GDP

1900–2000

Net Investment % Green % GS % GSTFP %

Great Britain 4.63 2.80 5.49 28.58

Germany 9.41 8.09 11.34 49.57

US 7.07 4.42 8.11 32.62

Australia 7.68 4.33 6.55 24.69

France 8.93 8.38 11.76 29.07

Switzerland 14.07 14.39 17.53 45.40

Argentina 3.73 3.20 3.54 13.67

Brazil 11.10 3.88 5.71 27.29

Chile 2.06 −5.64 −3.75 1.82

Colombia 8.73 3.61 4.69 6.98

Mexico 8.58 −1.40 −0.30 7.24

1900–46

Net Investment % Green % GS % GSTFP %

Great Britain 2.6 0.9 2.4 20.8

Germany 9.5 8.0 10.1 49.3

US 9.3 6.3 8.3 38.0

Page 23 of 42

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A Sustainable Century?

1900–46

Net Investment % Green % GS % GSTFP %

Australia 7.6 4.6 5.5 25.1

France 5.2 4.7 6.3 35.5

Switzerland 11.5 11.8 13.9 54.3

Argentina 3.6 3.4 3.6 16.6

Brazil 13.0 3.3 4.2 14.2

Chile 3.8 −1.7 −0.6 3.1

Colombia 1.5 −3.4 −3.0 −0.7

Mexico 2.4 −11.4 −10.9 –5.9

1946–2000

Net Investment % Green % GS % GSTFP %

Great Britain 6.29 4.43 8.07 35.08

Germany 9.35 8.16 12.36 49.83

US 5.21 2.88 7.96 34.36

Australia 7.75 4.11 7.42 24.35

France 12.09 11.47 16.35 23.66

Switzerland 16.24 16.56 20.57 37.95

Argentina 3.87 3.02 3.50 11.24

Page 24 of 42

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Superieure; date: 12 February 2019
A Sustainable Century?

1946–2000

Brazil 9.59 4.43 7.05 38.53

Chile 0.56 −8.96 −6.36 0.72

Colombia 14.80 9.45 11.17 13.40

Mexico 13.73 6.97 8.60 18.20

Source: Data appendix, http://www.st-andrews.ac.uk/media/dept-of-geography-and-sustainable-development/pdf-s/
DP%202016-15%20Blum%20et%20al.pdf

Page 25 of 42

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Superieure; date: 12 February 2019
A Sustainable Century?

Figure 5.2 GS and augmented GS with

TFP per capita: developed countries
1900–2000, GK$, 1990
Source: Data appendix, http://www.st-
andrews.ac.uk/media/dept-of-geography-
and-sustainable-development/pdf-s/
DP%202016-15%20Blum%20et%20al.pdf

Figure 5.3 GS TFP augmented in

GK$1990 per capita: developed countries,
1900–90
Source: http://www.st-andrews.ac.uk/gsd/
research/envecon/eediscus/

Page 26 of 42

However, by
far the largest
single
contributor to
wealth
accumulation
was through
the value of
technological
progress.
Technology is
broadly
defined as
including
human and
social capital,
but also the
quality of
formal and Figure 5.4 GS TFP augmented in
informal GK$1990 per capita: Latin American
institutions; it countries, 1900–90
is proxied as
Source: http://www.st-andrews.ac.uk/gsd/
TFP and
research/envecon/eediscus/
captures
productive
factors that are not included in physical capital and labour
inputs. Our augmented GS indicator includes the accumulation
of physical capital, pollution, resource depletion, and the
present value of future changes in technology. Our results
suggest that technology is an important intangible asset,
contributing 17 and 18 per cent of GDP to national savings in
France and Australia, respectively; 23 and 25 per cent in
Great Britain and the US, respectively; 28 per cent in
Switzerland; and 38 per cent in Germany.

Page 27 of 42

The development of GS in the panel of Western countries

mirrors the political and social history during this period (see
Figure 5.2). Important events influencing economic
development include the two world wars, the Great Depression
during the interwar years, and the depression during the early
1980s. These events are clearly visible in the data, but the
magnitude of the associated economic effects suggests that
these shocks were experienced differently across the six
Western countries. War economies during the First World War
resulted in negative GS in Great Britain, France, Australia, and
Germany, while GS in the US remained almost unaffected.
Similarly, Great Britain, the US, France and, in particular,
Germany experienced negative GS rates during the Second
World War. These effects mirror the extraordinary war effort
and the absence of any long-run development strategy; the
consequences of the Second World War were most devastating
in Germany, which (p.103) (p.104) (p.105) suffered
heavily due to dismantlement and destruction of capital, but
other European warring parties were also seriously affected.
Conversely, Australia and neutral Switzerland benefited from
the turmoil in terms of GS. A somewhat atypical pattern is
visible in the Swiss GS series. While the two world wars and
the Great Depression slowed wealth accumulation
considerably in many countries, Switzerland experienced large
savings. It is important to highlight Switzerland’s role as a
safe haven of capital, and the limited possibilities of import
and domestic consumption during these periods.

(p.106) Western countries in this panel developed rapidly

during the post-war Golden Age, both in terms of economic
growth but also in terms of GS. Between 1950 and 1970, GS in
the US and Great Britain almost doubled; French and German
GS almost tripled; and Swiss GS more than quadrupled. The
exception to this rule is Australia where GS were constantly
positive, although, by and large, stagnated during this period.
Only during the 1970s (p.107) and early 1980s did Australia
experience increases in GS. The global recession of the early
1980s is also visible in the development of GS; Great Britain
and the US experienced the largest decline in GS during this
period.

Page 28 of 42

In Figure 5.2 we present the augmented GS estimate, which

captures changes in the value of technology in an economy in
addition to conventional GS. During the first half of the
twentieth century, we find that a large share of wealth is
generated through the accumulation of technology, not
through conventional GS. The upper trend in each country
diagram reports the level of GS, including the present value of
future changes in technology. This development is reinforced
during the second half of the twentieth century, when
technology becomes a large contributor to wealth
accumulation. In the US, Great Britain, and Germany,
technology becomes the largest single contributor to wealth
accumulation during this period. By 1950, augmented GS in
these three countries is three to four times larger than the
conventional GS metric. In France and Australia, technology
also plays an important role with respect to wealth
accumulation, but levels of GS and augmented GS are
evidently lower than in the US, Great Britain, and Germany.
Switzerland, again, shows some atypical patterns regarding
the role of accumulation of intangible assets. Swiss GS and
augmented GS increased rapidly during the twentieth century,
but this increase seems to be the result of physical capital
accumulation; the present value of future changes in
technology appears to remain almost constant across time.

Page 29 of 42

Results for Latin America suggest that Net Investment during

the twentieth century was somewhat lower compared with
Western countries’ wealth accumulation. However, Net
Investment was considerable in Brazil, Colombia, and Mexico,
almost reaching Western levels (Table 5.2), whereas in
Argentina and Chile it was relatively low in comparison, but
positive on average. The most striking difference between
Latin American countries and the set of Western countries is
the generally low levels of augmented saving measures. If
resource depletion is incorporated in the Green Investment
indicator, savings are substantially lower, and reach negative
values for Chile and Mexico. Similarly, Brazilian and
Colombian investment figures drop from 11 and 9 per cent
respectively to approximately 4 per cent each when resource
depletion is considered. In Chile, depletion can be largely
attributed to copper ore and saltpetre depletion, while
Colombia and Mexico have been producers of petroleum.
Resource depletion is partly outweighed by investment in
education; the value of education expenditure ranges between
less than 0.5 per cent of GDP (Argentina) to up to 1.7 per cent
(Brazil). Moreover, with lower TFP growth, technological
progress accounts for only 2 per cent of GDP in Colombia,
between 10 and 20 per cent in Argentina and Brazil, and
approximately 5–7 per cent of GDP in Chile and Mexico.

Page 30 of 42

(p.108) Figure 5.4 allows a closer look at the development of

investment in Latin America, including the effects of social
turmoil and somewhat higher investment rates in the second
half of the twentieth century. We cannot identify a clear trend
in the development of GS during the first half of the twentieth
century; in fact, by and large, we observe long periods of
stagnation, interrupted by the world wars and, to a lesser
extent, by the Great Depression. Latin American economies,
however, were generally less affected by these events
compared with some Western countries. The Mexican
Revolution of 1910–20 resulted in highly negative GS—both
during the Revolution and in its aftermath. Mexican GS turned
positive only during the Second World War. The second half of
the twentieth century generally brought somewhat higher GS,
and some Latin American economies experienced a sustained
increase in savings. Decisive events in this period include
capital flight after 1970 and the Chilean depression after
1973–5, which were related to socialist reforms and the
consequent coup d’état. Chilean GS recovered slowly, reaching
positive rates only in the early 1980s. The global recession of
the early 1980s, and especially the depression of Asian
economies in the late 1990s, affected Latin America, leading
to plummeting investment.

5.5 Conclusions
This chapter provides estimates of the development of a series
of ‘global’ and national savings metrics using a panel of eleven
countries in the course of the twentieth century. We compare
Net Investment, GS, and an augmented GS measure that
considers the value of technology, to assess the degree of
weak sustainability of these countries.

We find that GS were mostly positive during this period and

increased substantially during the second half of the twentieth
century. The results for six Western countries in our panel—
Australia, France, Germany, Great Britain, Switzerland, and
the US—suggest that the Western world experienced a large
accumulation of capital, and that a sizeable share of this
capital accumulation occurred due to intangible assets such as
technology. For Latin America, we find that physical capital
accumulation was largely positive during the twentieth
century. However, most Latin American countries in our panel
experienced substantial depletion of natural resources, and
this disinvestment reduced national savings considerably.

Page 31 of 42

The eventful history of the twentieth century left severe

marks, which are reflected by the investment and savings
figures presented in this study. The First World War is the first
of these events; it resulted in plummeting savings rates among
European warring parties. The Great Depression, which is
considered one of the most severe depressions in history, had
a similar impact (p.109) among the affected countries. The
most devastating effect, however, came about during the
Second World War, when a great deal of economic resources
were invested in the war effort, and long-run development
strategies were largely absent. The second half of the
twentieth century brought substantial increases in wealth
accumulation, especially in Western countries, but also
setbacks during the oil crisis in the 1970s and the global
economic depression in the early 1980s.

However, we find that the treatment of CO2 and how it is

priced has an enormous impact on the sustainability signal
(e.g. Pezzey and Burke, 2014). The two prices shown—the high
‘business-as-usual’ and the lower ‘control’—highlight the
messages embodied in their assumptions: if there are no
attempts to control emissions into the future, then the
twentieth century was a century built on unsustainable
practices. If, however, the damaging potential of uncontrolled
emissions is accepted, and these emissions are optimally
‘controlled’, then the development seen in the twentieth
century can be determined to have been on a sustainable path.
Only time can tell.

Page 32 of 42

Why do these events matter? The results presented in this

chapter have strong implications for the present and future
economic development of the countries considered in this
study. A number of studies argue that consumption is a
function of (previous) capital accumulation, since the
productive basis (i.e. labour and physical and intangible
capital) is the productive force used to generate income. The
lessons from these studies are straightforward: current
investment in physical capital, intangible assets such as
human capital, and technology may result in higher
consumption, wages, and well-being in the future. Likewise,
erosion of the productive basis due to depreciation of assets,
pollution, and depletion of natural resources may limit, or even
reduce, future well-being. The implications of this perspective
for the ‘global’ economy are clear: in order to ensure future
sustainability, the Hartwick Rule ought to be followed and
technological progress (i.e. an increasingly intelligent use of
existing assets) can play an immense role in future
sustainability, especially when taking into account the future
development of the new economic giants of the twenty-first
century, China and India.

Acknowledgements

This paper has benefited from comments and suggestions from

Jean-Pascal Bassino, Nick Hanley, and participants at the 10th
Sound Economic History Workshop at Lund University, and the
Högre Seminariet at the Economic History department, Umeå
University. We thank the Leverhulme Trust for partly funding
this work. We thank Maria Carolina Camacho, Therese
Hoefeler, Christoph Klenk, and Philipp Mennig for research
assistance.

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Vincent, J. R. (2001), ‘Are Greener National Accounts Better?’,

Center for International Development at Harvard University,
CID Working Paper 63.

Weitzman, M. L. (1997), ‘Sustainability and Technical

Progress’, Scandinavian Journal of Economics, 99:1, pp. 1–13.

Weitzman, M. L. (1999), ‘Pricing the Limits to Growth from

Minerals Depletion’, Quarterly Journal of Economics, 114:2,
pp. 691–706.

World Bank (1997), Expanding the Measure of Wealth:

Indicators of Environmentally Sustainable Development
(Washington, DC: The World Bank).

World Bank (2006), Where is the Wealth of Nations?

Measuring Capital for the 21st Century (Washington, DC: The
World Bank).

World Bank (2011), The Changing Wealth of Nations:

Measuring Sustainable Development in the New Millennium
(Washington, DC: The World Bank).

World Bank (2015), World Development Indicators 2015

(Washington, DC: The World Bank).

Page 39 of 42

World Commission on Environment and Development (1987),

Our Common Future, Report of the World Commission on
Environment and Development [‘The Brundtland Report’]
(Oxford: Oxford University Press). (p.114)

Notes:
(1) Similar approaches are adopted in Arrow et al. (2012) and
UNU-IHDP and UNEP (2012, 2014), which also focus on
measuring wealth and changes in wealth as a measure of
sustainability.

(2) The World Bank has annually updated estimates, and the
most recent cover 159, 152, and 131 countries in 2011, 2012,
and 2013, respectively. Data taken from http://
data.worldbank.org/topic/environment.

(3) Rostow’s preconditions were ‘a rise in the rate of

productive investment from, say, 5 per cent or less to over 10
per cent of national income (or net national product)’, and that
this definition ‘is also designed to rule out from the take-off
the quite substantial economic progress which can occur in an
economy before a truly self-reinforcing growth process gets
under way’ (emphasis added). See also Arndt (1987, pp. 54–
60) for a discussion on the importance of capital formation in
early development theory.

(4) So a $1 decrease in the value of natural capital can be

compensated by a $1 increase in human capital for instance.

(5) ‘Sustainable development is development that meets the

needs of the present without compromising the ability of
future generations to meet their own needs. It contains within
it two key concepts: the concept of ‘needs’, in particular the
essential needs of the world’s poor, to which overriding
priority should be given; and the idea of limitations imposed
by the state of technology and social organizations on the
environment’s ability to meet present and future needs’ (World
Commission on Environment and Development, 1987, p. 43).

(6) Such as how to measure technology—i.e. research and

development (R&D), patents, energy intensity, TFP.

(7) Although Ferreira and Vincent (2005) found that education

spending was a poor proxy for human capital formation and
did not substantially improve the performance of the indicator.

Page 40 of 42

(8) For a full list of data sources by country, see data appendix,
http://www.st-andrews.ac.uk/media/dept-of-geography-and-
sustainable-development/pdf-s/
DP%202016-15%20Blum%20et%20al.pdf.

(9) This data was readily available for various countries, but
for some countries we estimated Net Investment using gross
investment and consumption of fixed capital, or simply annual
depreciation of assets (for a detailed list of sources used, see
data appendix, http://www.st-andrews.ac.uk/media/dept-of-
geography-and-sustainable-development/pdf-s/
DP%202016-15%20Blum%20et%20al.pdf).

(10) We used the market value of extracted renewables and

non-renewable resources as well as the extracted quantities to
compute the gross revenues. The average extraction costs
were estimated using labour requirement and the average
wage of labourers. Similarly, estimates of the value of the
change in timber stocks by country were based on changes in
area covered with forests, the average quantity of timber per
cubic metre and the market value of timber. For more recent
periods, FAO (2010) provides estimates on the cubic quantities
of timber on a given surface area; it is likely that applying this
methodology to historical periods overestimates historical
forest stocks since we implicitly assume than the high modern
tree-planting density has existed throughout the period under
observation.

(11) The trend TFP was extracted using a Kalman filter.

(12) Table 3 of Arrow et al. (2012) incorates a measure of TFP,

but does so by adding the current TFP growth rate to the per
capita growth rate of total (comprehensive) wealth. However,
this approach adds only one year and does not take account of
the value of time as an uncontrolled capital stock. The choice
of twenty years follows Pezzey et al. (2006) and Greasley et al.
(2014). Using the case of Argentina as an example, where the
present value of TFP is 10.12 per cent over twenty years, if a
shorter horizon (ten years) is used this is reduced to 8.45 per
cent of GDP; if a longer horizon (thirty years) is used it is
increased to 15.87 per cent of GDP. Therefore, by choosing a
twenty-year horizon we err on the side of underestimation of
the value of technological progress.

Page 41 of 42

(13) For a more comprehensive overview of data sources used

see the data appendix, http://www.st-andrews.ac.uk/media/
dept-of-geography-and-sustainable-development/pdf-s/
DP%202016-15%20Blum%20et%20al.pdf. See also Blum,
McLaughlin, and Hanley (2014); Camacho (2014); Greasley et
al. (2014); Greasley et al. (2016); Höfeler (2014); Klenk
(2013); and Mennig (2015).

(14) Stock valuations of global ecosystem services are most

notable at the end of our period of study, such as Costanza et
al. (1997), who estimated the global value of the entire
biosphere to be $16–$54 trillion, and Costanza et al. (2014),
who updated these figures from 1997 to 2011. However, these
stock valuations do not enable us to value changes in
ecosystem services in the years preceding 1997. Furthermore,
there has been increased use of revealed- and stated-
preference methods to value changes in environmental goods
and services. However, these studies have not been applied
consistently over time, and benefit transfers may not be
spatially or temporally applicable for all countries in our study.

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